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Have 403(b), 401(a) and solo401(k), want to do Mega BD Roth IRA but 403(b) limiting

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  • Avatar Hulk 
    Participant
    Status: Physician
    Posts: 9
    Joined: 09/04/2019

    As I pointed out in my previous post, Schedule SE explicitly directs you multiply your business profits by 92.35%. This is to level the playing ground with W-2 employees. A W-2 employee’s FICA taxes are based on their W-2 Box 1 wages. The employer is paying FICA on that amount. However, a self-employed individual is both employer and employee and pays both halves as SE taxes. So the base for calculating SE taxes is reduced by 7.65%. Note: It is 92.35% even if you are only subject to Medicare SE taxes. It would be a recursive calculation otherwise and the IRS decided to simplify the calculation.

    Yes, I did have a typo of $804 -> $604 and carried that through. $60000 – $804 = $59,196. Your maximum employer contribution is $59,196 * 20% = $11,839.

    Click to expand…

    Lightbulb! I understand why now.  Even though I am not paying more in SS tax, having already maxed that out, I still have to reduce 1099 income by that amount, 7.65%, so that I don’t get to tax defer MORE than my W2 counterparts.  That is what you meant by “leveling the playing ground with W-2 employees.”  This doesn’t increase my SS tax, but it does decrease my tax deferred allowable amount.

    #244191 Reply
    Avatar Hulk 
    Participant
    Status: Physician
    Posts: 9
    Joined: 09/04/2019

    its not different.

     

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    Unlike Qualified plans, Non-qualified plans are subject to the tax-matching rule; the employer receives a tax deduction only when an employee has taxable income.

    #244194 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4447
    Joined: 01/08/2016

    thats not the question i was answering.

    #244196 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1907
    Joined: 02/01/2016

    Lightbulb! I understand why now.  Even though I am not paying more in SS tax, having already maxed that out, I still have to reduce 1099 income by that amount, 7.65%, so that I don’t get to tax defer MORE than my W2 counterparts.  That is what you meant by “leveling the playing ground with W-2 employees.”  This doesn’t increase my SS tax, but it does decrease my tax deferred allowable amount.

    Click to expand…

    Not quite right.

    You reduce your business profits by 7.65% to calculate less SE taxes, but your self-employed earned income = business profits – your actual 1/2 SE tax. If your W-2 Box 3 Social Security (SS) wages are > the SS maximum wage base, your SE tax rate is 2.9%.

    • SE taxes = business profits * 92.35% * 2.9%.
    • Self-employed earned income = business profits – 1/2 the above SE taxes.
    #244232 Reply
    Liked by Peds
    Avatar Hulk 
    Participant
    Status: Physician
    Posts: 9
    Joined: 09/04/2019

    thats not the question i was answering.

    Click to expand…

    Ok.  But still very different not being able to put as much in.  I saw this on another post and found it helpful.  Taking into account expense ratio (not counting the ER of the actual fund purchased) is different too when maxing a mega BD Roth IRA at 37,000 vs 56,000.  For example, mysolo401k.net will set it up for 500, then charge 125/yr to maintain plan document.  At some point you have to wonder if it is even worth it, just forget it and invest in taxable.

    yr 1: $500/$37K = 1.35%

    yr 1 $500/$56K = 0.89%

    yr 5 $500 + 125*4 = 1000/37K*5yrs = 0.54%

    yr 5 $500 + $125*4 = 1000/56k*5yrs = 0.35%

    #244282 Reply

Reply To: Have 403(b), 401(a) and solo401(k), want to do Mega BD Roth IRA but 403(b) limiting

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